It’s already an economic basket case, dependent on Federal Government subsidies to build submarines and other naval vessels. By reference to its ham-fisted economic management, the choice made by its Labor government to throw all to the wind probably seemed like a clever one, back in 2002.

But, economics has a mean way of reckoning with fools and those who otherwise seek to defy its edicts. For the sake of argument, let’s call them ‘consequences’.

In this piece, Alan Moran – a hard-hitting economist, if ever there was one – collects just some of them; and he doesn’t quarantine the pending disaster to South Australia.

Yesterday the ALP is reported to be examining how it can shut down “ageing coal-fired stations”. This is part of the policy to reach 50 per cent renewable energy by 2030 and the Greens claim Shorten is seeking an escape from the Party’s previous announcements.

Coalition government policy is for a Direct Action buy-out of emissions coupled with 33,000 gigawatt hours of electricity from “large scale renewable energy” (mainly wind) plus small scale units on rooftops.

At present, large scale renewables account for 12.75 per cent of electricity and the small scale units a little under 10 per cent. Large scale renewables are to increase by another one third by 2020. There is no limit to the small scale units.

Both large and small scale facilities are subsidised, which for wind is currently $79 per megawatt hour, a level that provides a price of around three times that which conventional power supplies receive. In the case of rooftop solar the Commonwealth subsidy is less but there are also state government subsidies. Roof top facilities’ subsidies are paid up-front which defrays the installation cost.

In itself that is a testimony to the idiocy and cupidity of politicians falling for snake-oil claims that renewable energy is free and basking in the funding these purveyors of poverty offer to election campaigns.

If we have half of electricity supplied by renewables (ALP policy) the wholesale electricity cost will be at least double current prices; if the Coalition government policy is for renewables to comprise only one quarter of electricity supply the additional cost is 50 per cent.

Australia has the cheapest coal in the world, which has been crucial to industry competitiveness and low prices to the household. Both major political parties are intent on preventing us taking advantage of this natural wealth and undermining our living standards.

But there’s more!

First, wind, being low cost operationally, bids into the system at between zero and its own operational cost of about $10 per megawatt hour. This depresses the spot price generally and adds to the travails of coal fired stations, already under pressure from hostile governments and banks fearful of activists.

With luck, we can get away with simply experiencing sub-potential living standards by seeing demand and supply matched with the closure of industries like smelting and steel that offer the highest labour productivity.

Secondly, renewable energy (other than hydro) is intrinsically unreliable. Supply can go from 100 per cent to zero in a few minutes and much renewable output is unavailable at night.

At existing shares of renewables this presents stability problems for the entire system and requires synchronous flexible generation (fast start gas) to fill the supply valleys when wind and solar are unavailable. These need a premium price which has to be reflected in customer bills and require a vastly more complex system management and one fraught with risks of breakdown.

South Australia has been in the forefront of renewable generation and this has forced the closure of coal and gas plant.

With wind and solar sometimes supplying 60 per cent of supply, the state’s instability problems are critical. They are papered over by politicians abandoning the national electricity market principles whereby the beneficiary pays for transmission.

Each new windfarm constrains earlier ones off the grid and, instead of new facilities paying for a stronger grid, the costs are smeared across inter-state users. And, at the same time, because there is a national market for electricity, the premium costs of wind in South Australia are largely shared across all states.

Australia’s problems are being observed elsewhere.

Germany has now decided that it cannot allow renewables to reach much more than 40 per cent of electricity by 2025 which means a halving of new wind build.

In California, where wind has entailed very high energy prices, the balance for wind’s peaks comes from gas storage but the most important source for southern California, has been leaking and is now under repair sparking forecasts of some 14 days of scheduled blackouts this summer.

Australia’s national energy market started life with relatively few political oversights but has evolved into one of political control. The contrast between it and the self-managing telecommunications system is stark. The rationale for energy intervention is largely politico-environmental with overlays of administered prices to prevent the effects being readily visible.

After ten years of this, the system is now in a precarious state as well as no longer providing the low cost supply that was ushered in with the deregulations and privatisations 20 years ago.Catallaxy Files

Alan – a master of understatement – points out that the ‘fast start’ (ie Open Cycle Gas Turbines) essential to covering routine, total and totally unpredictable wind power output collapse “need a premium price which has to be reflected in customer bills”.

“Premium” indeed!

With SA’s average spot price for 2015 of $72 per MWh in mind, consider the effect on ‘customer bills’ when wind power output collapses and the spot price approaches or hits the Market Price Cap.

That cap – currently $13,800 per MWh – sets the upper limit of what peaking power generators can extort from the system: for a rundown on how the National Energy Market is designed to work, see this paper: AEMO Fact Sheet National Electricity Market

Comments

This article from RenewEconomy is worth reading through for some insights into the operations of a renewables generation company – Infigen (a favorite here). Bear in mind that this article is trying to promote the renewables industry by showing how difficulties can be overcome so it cannot be dismissed as a beatup by the anti-renewables lobby, “big oil”, “big coal” or whoever else the renwables industry normally accuses for negative perspectives.

Firstly, the article states

Since the wind was free the natural expectation was that the variable operating expenditure [opex] of a wind farm would be very low. In fact it turns out that gearboxes break down and that these big powerful pieces of equipment cost a lot to run. It works out to be about $20/MWh, that’s more than a brown or black coal generator. That’s right, the opex for a wind farm is probably higher than for a coal generator

plus

PV solar farms also cost around $20/MWh. It’s a mystery to me where that money goes.

Finally, an admission that even if the capital costs are ignored, wind and solar energy are far from “free”.

The article then qoes on to detail some of the financial difficulties that Infigen have experienced and how they managed to reduce debt by fire selling their portfolio of US “assets” (with a note on how this reduced the company’s complexity – it is, after all, a remanent of the Babcock & Brown group).

But the kicker is the analysis into the crucial role played by RECs in Infigen’s income for uncontracted wind generation.

Infigen states that ebitda increases around $0.8 million for every $1 increase in the combined pool and REC price

The pool prices are the actual market rates that a normal dispatchable generator would receive. Now look at the breakup

Since Dec 31 2015 REC prices have been consistently around $75-$80 but the pool price received by wind in the June quarter to date in South Australia is just $30

The RECs form more than 70% of the income!

Finally, costs may well increase in the near future

Most of the Australian wind farms are still on manufacturer warranty agreements and there will be a change in costs and risks once these expire (mostly over the next 12-18 months)

Thanks analitik. Nice to see a few concessions being made by ruin-economy. However, the ‘opex’ figure at $20/MWh is light on. Infigen’s financials show the figure for Operations and Maintenance at around $25/MWh (23.93 to 24.77) back in 2012/2013. But that ignores the increasing cost of maintenance and repairs as turbines wear out (gearbox, bearing and blade failures top the list). And, as pointed out, warranties will expire soon (for Infigen many already have), lumping the operator with bills in the hundreds of $millions. See our posts below for more:

I will admit that I had not thought to look at Infigen’s finanicial statements for operating costs. The 2015 Annual report has the figures for FY 2013/14 at $23.00 / MWh and 2014/15 at $23.80 / MWh on page 18. I will be looking at the report for this financial year with interest to see if costs have continued to rise.

Still, this is “polishing the cannonball” vs an admission by the great spruikers of renewables that both wind and PV farms do not generate electricity “for free, once set up”. Being able to point to an article by such a strong advocate as RenewEconomy to indicate the operating costs and levels of subsidy is surely a great piece of ammunition to fire back at those who accuse you of doctoring figures while being too lazy to back check your references. Even Dave Clarke would have a difficult time rambling his way out of this.

If half of electricity is to come from renewables then the capacity of the proper power stations will decline to about the level that can only supply the other half, which will cause a bit of a problem when the renewables produce next to nothing, unless you have a big interconnector to a neighbouring state run by grown-ups, only too willing to sell you their surplus electricity at inflated prices.

That’s what SA is relying on – the hand-out of reliably produced energy from Victoria and they say NSW, but what happens when those two states start to shut down their reliable supplies of energy, and install all the turbines they have on their books plus more. Where will any of these States get the reliable energy supply from!!!!!
We have seen in Tasmania that reliance even on Hydro is uncertain, and their ‘life-line’ to Victoria has failed, just when the rain didn’t come to fill the rivers and dams for the hydro and the sun shone with sloppy low winds to turn the turbines there – what did they do – bring in diesel generators to try and keep the lights on and business operating.